Payment and Payment Terms
Payment disputes rarely start with someone refusing to pay. They usually start with a difference between how the parties expect payment to work and how the contract actually defines it. Construction agreements condition payment on documentation, approval, certification, and sometimes upstream funding. When those conditions are not met exactly as written, payment timing changes even if the work was performed properly.
The sections below explain how the most common payment provisions function during active projects and where problems typically develop.
On this page:
Contingent Payment Clauses
Iontingent Payment Clauses: Pay-When-Paid and Pay-If-Paid
Construction subcontracts frequently condition payment on whether the general contractor has received payment from the owner. These provisions are called contingent payment clauses, and they come in two forms that produce very different legal outcomes.
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, not 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, converting the clause to pay-when-paid, or preserving mechanic's lien rights as a separate recovery path.
For a review of how a specific contingent payment clause allocates risk in a particular agreement, contact Simon Law.
Retainage
Retainage provisions withhold a percentage of each progress payment, typically 5 to 10 percent, until certain conditions are met. The disputes are almost never about the percentage. They are about what triggers release.
Some contracts tie retainage release to completion of the subcontractor's own scope. Others tie it to substantial completion of the entire project, which means a subcontractor who finishes in month four of a fourteen-month project may wait a year or more for retainage. Others condition release on delivery of closeout documents, as-builts, warranty letters, or owner acceptance.
Before signing, subcontractors should identify three things: what percentage is being withheld, what triggers its release, and whether release depends on anything outside their control. If retainage is tied to project completion rather than scope completion, that is a financing cost the subcontractor is absorbing and it should be priced accordingly.
Pay Applications and Documentation
Most payment disputes that get labeled as "nonpayment" are actually documentation problems. The work was done. The owner or GC does not dispute the work. But the pay application did not include the right lien waiver format, or the schedule of values was not updated, or the certified payroll was missing, or the insurance certificate expired.
Contracts typically define exactly what must accompany a pay application for it to be considered complete. When a pay application does not comply, the paying party has a contractual basis to reject or delay it regardless of whether the work was accepted.
The fix is operational, not legal. Project teams should pull the pay application requirements from the contract before the first billing cycle and build their internal process around those requirements. Treating pay application compliance as an administrative task rather than a contract obligation is one of the most common causes of cash flow problems on construction projects.
Notice Requirements
Many construction contracts require written notice within a defined number of days to preserve rights related to changes, delays, or disputed deductions from payment. These deadlines are often short, sometimes five to seven days, and they run from when the event occurs or when the party knew or should have known about it.
Missing a notice deadline does not always eliminate the right entirely, but it gives the other side a contractual defense that can be difficult to overcome. Courts and arbitrators regularly enforce strict notice provisions in construction contracts.
The practical solution is to identify the notice requirements at the start of the project and build them into project communication. If the contract requires written notice of a change within seven days, the project manager needs to know that before the situation arises, not after payment has been withheld.
Payment Terms Under Kentucky Construction Practice
Kentucky's Fairness in Construction Act (KRS 371.400-371.425) governs payment timing, retainage, and certain contract provisions on construction projects in the Commonwealth. Contractors and subcontractors working in Kentucky should understand how the Act operates alongside the contract terms.
Payment Timing
The Act requires owners to pay contractors undisputed amounts within 30 business days of receiving a payment request. Contractors must then pay their subcontractors within 15 business days of receiving payment from the owner. These are statutory requirements that apply regardless of what the contract says about payment timing.
Retainage Limits
The Act caps retainage at three stages. Until the project is 51% complete, the withholding is limited to 10% of the undisputed amount due. After 51% completion, retainage drops to 5% of the total contract amount. After substantial completion, the party may withhold only 200% of the value of contractually obligated work remaining. Retainage calculations should not include the value of owner-furnished materials that are not part of the downstream party's contract amount.
Barred Contract Provisions
Three types of provisions are unenforceable under the Act. First, a contract may not waive a party's right to resolve disputes through litigation, though binding arbitration and nonbinding ADR as a prerequisite to litigation are still permitted. Second, a contract may not waive or release mechanic's lien rights under KRS Chapter 376, except for partial waivers tied to progress payments. Third, a contract may not contain a no-damages-for-delay clause, though notice requirements and other limitations on delay damages are permitted.
If a contract includes a provision that violates the Act, the invalid provision is severed and the remainder of the contract is enforceable.
Penalties
When a party fails to make payments or release retainage as required by the Act, 12% annual interest accrues automatically on the unpaid amount from the date it became due. A party that prevails in an action to enforce rights under the Act, including arbitration, may recover costs and attorney's fees if the opposing party acted in bad faith.
Contingent Payment Clauses Under Kentucky Law
Kentucky does not have a statutory prohibition on pay-if-paid clauses. Courts have addressed enforceability through case law, and the outcome depends on whether the clause is drafted with clear and unambiguous language establishing a condition precedent to payment. Vaguely worded provisions are more likely to be treated as pay-when-paid timing mechanisms.
Mechanic's Lien Rights
Kentucky's mechanic's lien statute (KRS Chapter 376) provides a separate recovery path for unpaid contractors and subcontractors on private projects. Lien rights exist independent of the contract's payment terms, but they are subject to strict filing deadlines that vary depending on the claimant's role in the project. Preserving lien rights while a contingent payment clause is in dispute can be critical to maintaining leverage.
Payment timing in Kentucky is governed by both the Fairness in Construction Act and the specific contract terms. Where the contract imposes requirements stricter than the Act, the contract controls. Where the contract attempts to circumvent the Act's protections, the Act controls. Understanding both layers before execution is the most effective way to avoid payment disputes during the project.
For a review of how payment provisions operate in a specific agreement, contact Simon Law.