Pay-When-Paid Clauses: What GCs Need to Know About Subcontractor Payment

If you're a General Contractor, you're in the middle of a payment sandwich.

The owner owes you. You owe your subs. And if the owner doesn't pay, your subs still expect to get paid.

That's why many GCs use pay-when-paid clauses — "I'll pay you when the owner pays me."

It sounds reasonable. But it's a legal minefield, a relationship killer, and often doesn't work the way GCs think.

What Is Pay-When-Paid?

Pay-when-paid is a contract clause that says:

The idea: If the owner doesn't pay the GC, the GC doesn't have to pay the sub.

Reality: It's not that simple.

Pay-When-Paid vs. Pay-If-Paid

These sound similar but have very different legal meanings:

Pay-When-Paid

Meaning: The GC must pay the sub within a reasonable time after receiving payment from the owner.

Legal effect: In most states, this just delays payment — it doesn't eliminate the obligation. If the owner never pays, the GC still has to pay the sub eventually.

Pay-If-Paid

Meaning: The GC only has to pay the sub IF the owner pays the GC.

Legal effect: This attempts to shift the risk of non-payment to the sub. If the owner never pays, the sub never gets paid.

Why Pay-When-Paid Causes Problems

1. It Shifts Risk to Subs Who Can't Bear It

Your subs don't have a relationship with the owner. They can't chase the owner for payment. They can't file a lien (usually). They rely on you.

When you say "I'll pay you when I get paid," you're asking them to finance your client's non-payment.

2. It Creates Cash Flow Crises for Subs

A sub who's waiting 90 days for payment has bills to pay. Crew wages. Material suppliers. Equipment.

They can't wait. So they either:

• Stop working (your project stalls)
• Take other work (you lose capacity)
• Go out of business (you lose a sub)

3. It Damages Relationships

Good subs talk. If you're known for slow payment, the best subs will stop bidding your work.

The subs who do work with you will either:

• Price in the risk (higher bids)
• Require payment terms that protect them
• Walk away when things get tight

4. It May Be Unenforceable

As mentioned, many states don't enforce pay-if-paid clauses. Even pay-when-paid clauses have limits.

If a sub sues you for non-payment, you may lose — and owe attorney fees on top.

Better Ways to Structure Subcontractor Payment

1. Net 30 Regardless of Owner Payment

The clause: "Subcontractor will be paid within 30 days of invoice, regardless of whether Owner has paid GC."

Why it works: Subs get paid on time. Your relationship is protected.

The risk: If the owner doesn't pay, you're out of pocket. But that's your risk to bear as the GC — you chose the owner.

2. Net 45 with a Cap

The clause: "Subcontractor will be paid within 45 days of invoice. If Owner has not paid GC within 45 days, GC will pay Sub within 60 days regardless."

Why it works: Gives you time to chase the owner. Caps the sub's wait time.

The risk: You're still on the hook at 60 days.

3. Progress Payments Match Owner Payments

The structure: Structure sub payments to match when you receive owner payments:

Why it works: You're not fronting money. Subs get paid when you get paid, but within a reasonable time.

Retainage: The Other 10%

Most GC contracts include retainage — typically 10% held back from each payment until the project is complete.

Why GCs Hold Retainage

• Leverage to ensure subs finish punch list
• Protection against warranty claims
• Cash flow buffer
• Standard practice in commercial work

Why Retainage Hurts Subs

• They've already paid their crew and suppliers
• 10% might be their entire profit margin
• Waiting 30-90 days after completion is a cash flow killer
• Some GCs drag out final payment indefinitely

Fair Retainage Practices

How to Handle Owner Non-Payment

When the owner doesn't pay, what do you do about your subs?

Option 1: Pay Them Anyway

If you have the cash reserves, pay your subs on time and chase the owner separately.

Pros: Keeps subs happy, protects relationships.

Cons: You're out of pocket until owner pays.

Option 2: Communicate Early and Often

If you can't pay subs because the owner hasn't paid you:

• Tell subs BEFORE payment is due
• Explain the situation
• Give them a timeline
• Share what you're doing to chase payment

Most subs will work with you if you're honest. They won't work with you if you ghost them.

Option 3: Stop Work Together

If the owner isn't paying, you can stop work. Your subs should stop too.

Present a united front: "We can't continue until we receive payment."

Option 4: File Lien

You have lien rights. So do your subs (in most states).

If the owner isn't paying, file a lien. Your subs can file too. A lien on the property gets attention fast.

What Subcontractors Want from GCs

If you want good subs to keep bidding your work:

• Pay on time. Net 30 means 30 days, not 45.
• Communicate early. If payment will be late, say so before the due date.
• Don't hold retainage hostage. Release it when you say you will.
• Submit invoices promptly. Don't wait 2 weeks to send the owner your invoice.
• Honor change orders. If the sub did extra work, pay for it.
• Don't make them finance your client. Your non-paying client is your problem.

The Bottom Line for GCs

Pay-when-paid sounds like protection, but it creates more problems than it solves:

• It may be unenforceable
• It damages relationships
• Good subs will avoid you
• It shifts risk to parties who can't bear it

Better approach:

• Structure your contracts with owners to get paid before subs need payment
• Build cash reserves for the occasional non-paying owner
• Pay subs on time, regardless of owner payment
• Chase non-paying owners yourself — that's your job as GC

Key Takeaways

• Pay-if-paid is often unenforceable. Courts don't like shifting risk to subs.
• Pay-when-paid delays payment but doesn't eliminate it. You'll still owe subs eventually.
• Subs can't finance your non-paying clients. They have bills to pay too.
• Communication matters. Tell subs early if payment will be late.
• Retainage should be capped and released on time. 10% might be your sub's entire profit.
• Good subs talk. Your payment reputation affects who bids your work.

The GCs with the best subs are the ones who pay fastest. It's not complicated.