Pay-When-Paid Clause

A pay-when-paid clause provides that the general contractor will pay the subcontractor after — and typically within some days of — receiving the corresponding payment from the owner. Courts in most states read it as a timing mechanism, not a transfer of risk: the GC may delay payment for a reasonable period while pursuing the owner's money, but if the owner never pays, the GC still owes its sub. The clause shifts float, not ultimate credit risk. That interpretation is precisely what distinguishes it from its harsher sibling, the pay-if-paid clause, which purports to shift the risk of owner nonpayment entirely.

For anyone underwriting a subcontractor, pay-when-paid terms are a structural fact of the customer's cash flow: the sub's receivable from the GC does not mature on invoice, it matures on the owner's draw cycle plus the contractual lag. A sub can therefore be slow-paying its suppliers while being entirely current under its own contracts — the delay cascades downward mechanically. Distinguishing this cascading slowness from genuine distress is core construction credit skill: aging by job, asking which draw is pending, and knowing the owner and GC's payment reputation answer it far better than customer-level DSO alone.

Because "reasonable time" is elastic and litigation over it is expensive, the practical protections lie elsewhere: lien and bond rights do not wait for contractual payment conditions — statutory deadlines run from furnishing dates regardless of when payment is contractually due. A supplier or sub who lets a pay-when-paid narrative carry its receivable past a lien filing window has traded a secured claim for an argument. Enforceability nuances vary by state; educational, not legal advice.