ConstructionAdvisorToday

Are ‘Pay-If-Paid’ Clauses Still Widely Used?

Bruce Jervis, Editor
Construction Claims Advisor

Pay-if-paid clauses shift the ultimate risk of project owner nonpayment from the prime contractor to a subcontractor. Owner payment for the subcontractor’s work is a condition precedent to the contractor’s obligation to pay the sub. The harsh ramifications of these clauses, and the perceived superior bargaining power of large general contractors over specialty trade contractors, have led to legislative and judicial restrictions on enforceability.

New York is one state where pay-if-paid clauses are generally unenforceable. Years ago the state’s highest court ruled that the clauses impermissibly negate subcontractor mechanic’s lien rights. But what if the subcontractor had no lien rights? In a recent case, the project had been located on Indian tribal land which was not subject to the state mechanic’s lien law. Consequently, a pay-if-paid clause was enforceable against a subcontractor.

While the enforceability of these clauses has been restricted in some jurisdictions, they are fully enforceable in others. Have you seen a reduction in the use of pay-if-paid clauses in the industry? Do you see these clauses included in contracts governed by state law which refuses to enforce them? I welcome your comments.

Featured in Next Week’s Construction Claims Advisor:

• Subcontractor Refusal to Perform Not Justified by Separate Payment Dispute
• Expert Opinion Disallowed Despite Impressive Credentials
• Non-Union Contractor Sues Over Project Labor Agreement

The Misuse of Expert Opinion

Expert witnesses frequently have a lot to offer. Their specialized expertise can assist the finder of fact, be it judge, jury or administrative board, in understanding factual evidence or resolving a fact that is in question. But expert testimony can also be misused.

Do You Know Who You’re Dealing With?

On virtually every construction project, public or private, the contractor deals directly with a designated representative of the project owner. The owner’s rep provides information, answers questions and conveys directives. The representative seems to act with considerable authority and autonomy. That impression, however, can be misleading.

Have You Ever Been Slandered During a Past Performance Review?

In public contracting, a bidder must be deemed “responsible” in order to be eligible for contract award. Bidder responsibility relates to financial resources, managerial capability and past experience. Some of these considerations can be stated clearly and measured objectively. Some cannot. Performance on prior projects is one of the more problematic factors.

Should Notice-of-Claim Provisions Be Strictly Enforced?

Construction contracts usually contain notice-of-claim provisions. The contractor must, within a stated period of time, notify the project owner in writing of any occurrence which may give rise to a claim for additional compensation under the contract. The policy behind these requirements is sound. Owners should have the opportunity to respond to problems as promptly as possible while options are available and costs can be mitigated.

What Do ‘Acceptable Industry Standards’ Add to a Contract?

Construction contracts commonly recite that all work must be performed in accordance with acceptable industry standards. But what are these standards, and how are they determined? Does a recitation of this nature really add anything to a construction contract? Two recent cases addressed these issues head on.

Do You Always Follow Change Order Procedures?

Changes are a fact of life in the construction process. Contract documents give the project owner the right to expand, reduce or otherwise alter the scope of work. The contract documents also spell out a process whereby contractors propose, and project owners approve, change orders. Subcontracts include similar provisions. Failure to adhere to the stipulated process can be costly. A Michigan subcontractor recently learned this the hard way.

Are Site Condition Claims Obsolete on Design-Build Projects?

It is self-evident that design-build contracts place much more responsibility -- and risk -- with the contractor than a traditional contract for construction only. The parameters of that risk continue to be defined in the courts. A recent federal case calls into question the ability of design-build contractors to recover for differing site conditions.

Are Public Projects Being Disguised as Private?

The line between public works and private projects continues to blur. Innovative contracting methods and partnering arrangements allow public money to subsidize for-profit projects, while representing those public-purpose projects as private. Sometimes this is driven by financial imperative; sometimes by political considerations.

Shop Drawings and Other Submittals: Approved or Disapproved?

The submittal process on a construction project is a difficult one. The contractor is required to submit shop drawings, product samples, manufacturer’s specifications, etc. establishing that the contractor’s proposed method of performance will comply with the contract requirements. If the contractor is proposing to deviate from those requirements, the contractor must clearly and prominently say so.