Contracting Pitfalls Part Nine: Time for Payment
Almost all contracts involve the payment of money on the part of one party or the other. A very clear understanding of when payment is to be made is important. However, I have seen contracts that simply say, “payment will be made monthly” without specifying a day. I have also seen contracts that provide for payment on the 31stof the month where there is not a 31stin some of the months of the year. So, specificity and accuracy is important here.
Okay, that seems straightforward, but there are types of contracts that provide a different payment schedule. It particularly arises when working as a subcontractor. There are two types of provisions used in this arena that are problematic. The first is a provision that provides that you will be paid only when the general contractor is paid. This is generally referred to as “paid when paid”. If you are not in direct communication with the owner, you are at the mercy of the general contractor to process payment requests appropriately. You will also be waiting on the general contractor to work through any issues it has with the owner before you get your payment.
The second type is more insidious and that is for a provision that says you will get paid onlyif the general contractor gets paid. If the general contractor never receives payment for whatever reason, you will never receive payment either. While it may be reasonable to agree to these of types of payment terms, they obviously make credit underwriting more challenging. You are making a judgment on both the general contractor and on the owner, not only as to their financial capacity, but also as to their character and integrity. If you enter into an agreement with one or both of these provisions, you need to fully evaluate whether or not you can withstand the lack of payment either for a significant period of time—or ever.