What happens to subcontractors when owners can’t pay their general contractors? If their subcontracts have “pay-if-paid” provisions, the subcontractors may be out of luck. Those provisions mean that if the general does not get paid, it does not have to pay its subcontractors. While there are a number of courts in other states that have declared pay-if-paid clauses to be unenforceable, that is not presently the rule in Colorado.

The last time the Colorado Supreme Court addressed the question, it suggested that pay-if-paid provisions would be enforceable in Colorado if (1) they clearly state that payment to the general contractor is a condition precedent to payment to the subcontractor, and (2) the language clearly provides that the subcontractor bears the risk of non-payment by the owner.

However, that was merely an observation by the court, not the ruling, because the case dealt with a pay-when-paid, not a pay-if-paid clause. Pay-when-paid clauses only postpone the general contractor’s obligation to pay its subcontractor in order to give the general time to collect.

Alert subcontractors attempt to persuade contractors to delete pay-if-paid clauses from their subcontracts. If they fail, they have two choices: (1) refuse the job, or (2) carefully monitor payments from their general contractors and stop work when payment issues arise. They may also have mechanic’s lien rights.

If the subcontractor is unsuccessful in having the pay-if-paid clause deleted from the subcontract, a requirement that the subcontract have payment terms that would allow the subcontractor to stop work upon only a few days’ notice if timely payments are not made. Subcontractors should also attempt to require, in their subcontracts, the opportunity to provide that their contractors give them timely notice if they are having problems getting paid by their owners.

Subcontractors stuck with pay-if-paid clauses should cut their losses by stopping work promptly when they are not being paid—however, they should first check and comply with their subcontract “stop work” provisions.

In these tough economic times, even seemingly well-healed owners frequently experience financial problems or difficulties with their lenders. Subcontractor knowledge of risks and rights and vigilance is extremely important if payment problems are to be avoided.

This column was written with the intent of providing general legal information intended to be reasonably accurate although not comprehensive. Readers are therefore urged to consult their attorneys for any specific legal advice they may desire concerning the subject matter of this column.