You may remember the cartoon show "Popeye the Sailor Man." If so, you will remember Popeye's friend Wimpy. Wimpy was the character that loved to eat hamburgers. However, Wimpy never had the money to support his love for burgers. In the cartoon, Wimpy would walk up to Popeye, Olive Oil or Bluto and say, "I will gladly pay you Tuesday for a hamburger today."
It is interesting that most subcontracts today include a "pay-if-paid" clause, which means the general contractor is not obligated to pay the subcontractor unless he or she first receives payment from the owner. Sometimes these clauses are also known as "condition precedent" clauses because the typical wording is, "receipt of payment from the owner is a condition precedent to contractor's obligation to pay subcontractor."
The pay-if-paid clause must have been inserted into our subcontracts at a very opportune time. Maybe we were all asleep or on an extended vacation. For whatever reason, it is here and will most likely stay unless we find a way to have it eliminated, or at least fight it at every turn.
Since it does exist and subcontractors either don't recognize it or agree to it much too readily, we must consider what we can do to protect our interests.
Level of confidenceMy first reaction to the clause is not to agree to it. However, I have found only a few GCs that will allow me to eliminate it. In most cases if I don't agree to the clause, the general will draw a battle line and find someone else that will sign the contract as is. Subs almost always hear the GC say, "The owner is fine; there is nothing to worry about." When he or she say this, the best response is, "That is wonderful! Since you have absolute confidence the owner will pay you, then you have absolutely nothing to worry about and we don't need the pay-if-paid clause. So just line through it on the subcontract and initial beside it!"
You will then find out just how confident the GC is about getting paid by the owner. If you can't get the clause removed, just by having this exchange in writing, documenting the GC's representation that the owner would pay gives you a leg up. You may be able to go after the GC on a misrepresentation claim if it turns out he or she did not do a good job of checking out the owner.
After I get over the fact that I will not be allowed to change the clause, I get to work finding out who the owner is. Our contract may appear to be with the GC, however, our payment is dependent upon the owner's ability or desire to pay the GC.
Knowing that my payment is conditioned upon the owner's paying the GC, I begin to check out the owner as follows:
1. Determine the physical location of the owner.
2. Perform a credit report.
3. Conduct a property profile on the new building.
4. Locate state records on the owner no matter if an individual or corporation.
5. Find other GCs that have worked for this owner.
6. Establish the current lender on the project.
These days, you can have the answers to all of these questions for less than a hundred dollars. I can get most of the information I need for free through the Internet, though there are companies that specialize in providing this data. One such company in Washington state is called Lien Research, located on the Internet at www.lienresearch.com.
You know as well as I do that it is important to really know your GC. However, it is vitally important to know the owner because he has the money! It is a good idea to call the lender to find out how and when funds are dispersed. I have on occasion called the owner just to introduce myself. Making contact with the owner gives me a level of confidence that is difficult to explain. How the owner talks to you may be an indication as to what kind of person he or she is. Also, keep in touch with the architect. The architect normally approves the GC's application for payment and can tell you how much was approved for your work and if change orders were approved for payment. Most of the time, he or she also knows when draws have been disbursed.
A poor GC trusts the owner to pay, a good GC verifies the owner can pay and a great GC not only verifies the funds, but also has them set aside and makes sure the owner pays on time! Great GCs working for great owners are the people we want to work for. In many cases, we have poor or good GCs working for poor or good owners.
Written wordIf the GC has verified the funds and has been successful in having these funds set aside, there is still an issue with change orders.
Let's say you performed $10,000 worth of change-order work, which the owner feels should have been included in the GC's bid to the owner and is not an extra. If you did the work without proper direction and documentation, you may not collect the money. If you followed a procedure that documented the GC's direction to do the work and your costs, you have a better chance of collecting the money from the GC or from whoever directed you to proceed. The best policy I have found regarding extra work is not to proceed until I have proper written direction from the owner and or GC.
Looking to the GC to pay you for extras or contract work he or she is not getting paid for is what the clause is all about. The GC does not want to be responsible for payment unless he or she gets paid!
You must agree a pay-if-paid clause is a great insurance policy for GCs. The premiums are cheap and it's difficult for lawyers to defeat. As you know, I have a problem with the clause and I especially dislike the fact we give it away. It's as if we are saying, "OK, general, if you don¿t get paid you don't have to pay us."
What motivation does the clause give a GC to make sure the owner has the money and the clout it takes to build a building? The subcontractors are taking the majority of the risk.
A pay-if-paid clause is totally unfair from a subcontractor's perspective. Not only is it unfair, it creates a level of distrust from the beginning. Our brains get pickled after awhile and we just accept it without really giving it the attention it needs.
If Wimpy always made good on his promise to pay, his offer is better than a pay-if-paid contract. We have no promise of payment from the GC and there is no specific date of payment.
Eliminate the language when you can, find out all you can about the owner, read the main contract regarding payments to the GC and find a good construction attorney and credit reporting company. Talk to your main suppliers and negotiate pay-if-paid clauses with them. (Typically they will laugh at you! They are not crazy enough to sign such an agreement!) Bad contract language travels downhill and there is no reason for subcontractors to take the majority of the risk. Share it with others, as do the GCs.
Subcontractors must stop agreeing to bad contract language. It has become a serious problem and will continue to get worse because owners, general contractors and their attorneys believe we will sign anything for a job! This type of clause indicates how important lien rights are. Make sure you know your state's lien laws and use them. The only thing we really have going for us is the fact we can lien the owner's property. So don't give that up, too!
Remember, teamwork begins with a fair contract!