What Is a Subcontractor Agreement? Pay When Paid Is Not Pay If Paid

What it does

A subcontract passes a defined slice of the general's obligation down to the trade that will actually perform it, along with the price, the schedule and the conditions attached to it.

It exists because the general is liable to the owner for the whole job, including work performed by people the owner has never met. Every risk the general accepted upstairs has to be placed somewhere downstairs, and the subcontract is where that happens.

That is also why subcontracts are lopsided. They are written by the party carrying the liability. Reading one properly is a fifteen minute job that pays better per hour than anything else on a jobsite.

Pay when paid is not pay if paid

These two clauses look like the same sentence with one word changed and they allocate risk in opposite directions. This is the distinction to read the contract for.

Pay when paid is about timing. It says the general will pay the sub within a period of receiving the owner's payment. If the owner never pays, the clause has run out of road, and in most states the sub is still owed the money after a reasonable time. The risk of the owner defaulting stays with the general.

Pay if paid is about condition. It says the general's obligation to pay the sub arises only if the owner pays the general. Payment by the owner becomes a condition precedent. If the owner goes under, the sub is not owed anything, and the sub has financed a building for free.

Courts do not like the second one. Several states refuse to enforce pay if paid clauses at all, and most of the rest demand that the transfer of risk be stated in explicit and unmistakable words rather than inferred. That is useful to know and it is not a reason to sign one, because litigating the enforceability of a clause is far more expensive than negotiating it out before work starts.

Flow down, and what it drags with it

Most subcontracts contain a flow down clause saying the sub is bound to the general by the same terms the general owes the owner. It is usually one sentence and it can be the longest sentence in the document by effect.

It means the prime contract's schedule, notice requirements, dispute procedure, indemnities and liquidated damages can all land on the sub, whether or not the sub has read the prime contract. Asking for a copy of the prime contract before signing is normal and reasonable, and the reaction to the request is itself informative.

The narrower version, which is worth proposing, flows down only the obligations relating to the sub's own scope of work rather than the whole contract.

What has to be attached

A subcontract with no attachments is a document about payment terms and nothing else. Four things belong with it and are routinely missing.

The scope of work, in the same words the general used with the owner for that portion. A gap between the two scopes is a gap the general pays for, and a scope narrower upstairs than downstairs is a sub being asked to do work nobody priced.

The schedule, including the dates the sub is dependent on rather than only the dates the sub owes. The insurance requirements, with the specific endorsements named. And the lien waiver form that will be used at each payment, so that nobody is handed an unfamiliar unconditional waiver at the door with a check in the other hand.

The clauses that decide the money

Skim the rest. These are the ones to read twice before signing.

Payment

When, and on what condition. Pay when paid or pay if paid, and any period stated in days from an event.

Retainage

The percentage held and what releases it. Many states limit a general to holding no more from a sub than the owner holds from the general.

Flow down

Whether the whole prime contract binds the sub or only the parts relating to the sub's own scope.

Change orders

Whether extra work needs written authorization before it is performed. It always should, and the sub is the party that suffers when it does not.

Indemnity

Who covers whom, and for whose negligence. Broad form indemnity is restricted or void in many states, and worth checking rather than assuming.

Termination for convenience

Whether the general can end the subcontract without cause, and what the sub is paid if they do.

What it looks like

This is the blank form as this site actually prints it, drawn from the same file the download button gives you. It is not a picture of somebody else's document.

What to do with it

Questions people ask

What is the difference between pay when paid and pay if paid?

Pay when paid sets the timing of payment and leaves the risk of an owner default with the general contractor. Pay if paid makes the owner's payment a condition of the sub being owed anything at all, which moves that risk onto the sub. Several states refuse to enforce pay if paid clauses, and most require the risk transfer to be stated in unmistakable words.

Is a subcontractor agreement the same as an independent contractor agreement?

No. A subcontract is between a contractor and another business performing part of a construction project. An independent contractor agreement is about the working relationship with a person or business who is not an employee, and it is largely a document about classification, tax and control. A small trade engagement may need one of each.

Can a subcontractor file a lien if the general contractor was not paid?

In most states, yes. A mechanics lien right generally belongs to whoever furnished labor or material to the property, and it does not depend on the payment flowing correctly between the parties above you. This is precisely why generals collect lien waivers at every payment.

Do I need a written subcontract for a small job?

The scope and the payment terms should be written down whatever the size, even if it is one page. The reason is not formality, it is that the disputes that get expensive are about what was included and when payment was due, and those are exactly the two things a verbal arrangement does not record.

Related terms