In Colorado’s business world, the use of pay-if-paid provisions can cause hardships for the self-employed subcontractor. Seeking to be paid in a timely fashion after work has been done, the subcontractor is at the mercy of the contractor and the owner who has not paid.
Under pay-if-pay provisions, if the owner never pays the contractor, then the contractor isn’t obligated to pay the subcontractor. While different states have different ways of treating pay-if-paid, many enforce the provisions.
This will be enforced according to the language used and if it’s clear and explicit. For example, in Colorado, the document must “unequivocally state” that the subcontractor will get paid only after the general contractor gets paid first by the owner. This provision must also explain that the subcontractor bears the danger of the owner’s nonpayment.
The subcontractor should try to negotiate this clause if it is in the contract. They might suggest an alternative provision. It’s also wise to assess the scope and size of the project and his involvement. If it is a public project, there is little room for negotiation.
On the other hand, a highly specialized subcontractor with not many competitors on a private project might be able to have the provision taken out. Or they can suggest a pay-when-paid provision, which allocates more time for a contractor to send the subcontractor’s payment.
Provisions of the subcontract as well as provisions in the prime contract are very important. Subcontractors should also read the “notice and claims provisions” in any subcontract.
Since construction law can be complex, the subcontractor should be aware of all the provisions in their contract. Disputes and non-payment can be troublesome and cause hardship and ill feelings. An attorney could provide guidance when creating contracts as well as disputing the terms of one that already exists.