Pay-if-paid vs pay-when-paid clauses explained

Who carries the risk of an owner who does not pay

How courts treat them

Many courts are reluctant to read a clause as pay-if-paid, because it can leave a sub unpaid for finished work. In many jurisdictions a clause shifts the risk only if its wording clearly makes the owner's payment a condition precedent. Unclear wording is often read as pay-when-paid. Some states go further and make pay-if-paid clauses unenforceable, or bar them from cutting off a sub's lien or payment bond rights. Others enforce them as written.

That is a matter of state law, and it changes. Do not assume a clause works the same way across state lines, and read the subcontract's exact words. Prompt payment laws in many states also set deadlines for paying subs once the general contractor is paid, and add interest for late payment; the deadlines vary.

A worked example with invented numbers

A mechanical subcontractor bills $60,000 for the month. The subcontract holds 10% retainage and says the sub is paid within 7 days of the general contractor receiving payment for that work.

• Retainage: 60,000 x 0.10 = $6,000
• Amount due to the sub: 60,000 - 6,000 = $54,000
• Check: 60,000 x 0.90 = 54,000

Scenario 1: the owner pays late. The general contractor is paid on day 40 instead of day 30. Under either clause, the sub's $54,000 is due by day 47 (40 + 7). The clause sets the timing.

Scenario 2: the owner goes bankrupt and never pays.

• If the clause is pay-when-paid, most courts would say the general contractor still owes the $54,000 after a reasonable time. The general contractor carries the loss.
• If the clause is a clearly worded and enforceable pay-if-paid, the general contractor may not owe the $54,000 at all. The sub's remaining routes are a mechanics' lien on a private job, a claim on the payment bond if there is one, or a claim against the owner's estate, each subject to its own notice deadlines.

Same work, same invoice, and $54,000 of risk moves from one party to the other depending on a few words in the subcontract.

Reading the clause

Words such as "condition precedent", "the subcontractor assumes the risk of the owner's nonpayment" and "only if and to the extent paid" point toward pay-if-paid. A clause that only says payment is due "within 7 days after the contractor receives payment" usually points toward pay-when-paid. If the clause is ambiguous, ask for it to be clarified before signing.

Common mix-ups

• Treating the two as the same. One sets timing, the other moves risk.
• Assuming pay-if-paid always works. Some states refuse to enforce it, and courts read unclear clauses narrowly.
• Forgetting the other remedies. Lien rights and payment bond rights may survive even an enforceable pay-if-paid clause, depending on the state.
• Ignoring retainage. The sub is due the amount billed less its retainage, not the full billing.

On the NASCLA exam

Subcontract terms belong to Procurement and Contracting Requirements, 31 of the 115 scored questions. Expect the concept: which clause moves the risk of owner nonpayment. Tab the contracts and subcontracts topic in the NASCLA Contractors Guide to Business, Law and Project Management.

Practice it

Follow the sub's other remedies in lien waivers and bid bond vs performance bond vs payment bond, and work the retainage arithmetic in the retainage guide.

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Sources

Show the list

• PSI Candidate Information Bulletin 1458, content outline and reference list, updated 7 Jul 2026. Retrieved 5 Nov 2026.
• NASCLA Commercial Exam, NASCLA. Retrieved 5 Nov 2026.