This article presents how ConstructionRisk, LLC typically revises and redlines contracts to protect against unreasonable payment provisions, and unreasonable demands to perform redesign in the event that the project pricing comes in over budget. We begin with pay-if-paid clauses, and then move on disclaiming warranties of cost estimates. In addition to this short article that includes sample clauses, we are providing a link to our new YouTube 3 minute video on this subject.
The Prime Consultant wants to make payment to subconsultants contingent on receiving payment from Client. The courts in different states have interpreted the words “pay if paid” and “pay when paid” differently, sometimes deciding they just mean “pay within a reasonable amount of time”. Including the words “payment from the Client is a condition precedent to payment” can add weight to the argument that the subconsultant will not be paid until the Prime has been paid.
What can a subconsultant, or subcontractor, do?
First – When we are advising the subcontractor, we attempt to revise the pay-if-paid clause to turn it into a pay-when-paid clause. We accomplish that by adding a time limit for payment. At the end of a sentence in a subcontract stating payment to the sub is conditioned precedent on payment by the owner, add the following:
- “Notwithstanding the foregoing, in no event shall Designer be paid the uncontested amount of any invoice later than 90 days from submittal.
Second -When there is pay if paid clause it is important that the Sub be able to cease performance of its services in the event of non-payment. Consider adding a clause like this to the end of the pay-if-paid clause.
- “If payment of any undisputed amount due and owing to DP is not made within 60 days of submittal of the invoice for such amount, Engineer shall, upon seven (7) days written notice, be entitled to suspend its services until such payment is made.”
Avoid Having to Redesign without Additional Compensation. When design professional contract states that the designer will perform redesign services needed as a result of the cost estimate being exceeded or construction bids coming in over budget, it often states it is without additional compensation. This may be alright, but the designer should limit when this service will be done for free. If you agree to a clause requiring you to provide redesign services, insert protective wording similar to the following:
“…. and will do so without additional compensation if due to failure to perform services consistent with the Standard of Care.”
Assuming that the contract has a reasonable standard of care clause, this means the redesign will only be done for free if the cost estimate was exceeded due to consultant’s negligence.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 3 (March 2022).
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