As a contractor or a subcontractor/supplier, you will often be in a position where a pre-prepared contract is presented to you for signature. This contract form includes the terms and conditions under which you are agreeing to perform services or provide materials. It will hopefully include the basic terms that interest you including the names of the parties, the scope of work, the price and the time for payment. It may also include significant unbalanced contract provisions.  

You will hopefully have a choice at the time that such a contract is presented to you to either accept the terms, to seek to negotiate the terms or to reject the terms and as the song suggests, “know when to run.”

 This volume of “Getting Paid” deals with the red flag terms that if not modified through negotiation should trigger a determination to walk away from that project. Unless there are other terms that so grossly outweigh these red flag terms, making the reward worth the risk of non-payment, a customer who is intent on having these terms included within the contract is a customer best left for your competitors.  

1.                  A strictly written “pay if paid” clause. While it is not unusual to see a clause that provides for payment of your bill within a set period of time after your customer receives payment from its customer, when that clause is written in such a fashion that there exists no entitlement on your part to payment unless your customer is first paid, you are simply setting yourself up for collection problems that will far outweigh most benefits that you could obtain from the contract. If the clause includes language where receipt of payment by your customer from its customer is an absolute condition precedent to your entitlement to recover any monies, your ability to collect can be impacted by payment problems between your customer and its customer wholly unrelated to your work. You are being asked under this clause to assume the risk of both your customer’s performance and of its customer’s ability to pay. Such clauses, if properly drafted may be enforced if not entirely, at least to the extent that you may be placed into a lengthy wait and see status pending the resolution of whatever dispute may exist between your customer and its customer.

2.                  A clause strictly limiting your ability to receive payment on change orders to the customer’s ability to obtain a change order from its customer.  These clauses are typically bundled together with related clauses that allow your customer to issue work directives to you requiring you to perform extra work prior to receiving assurance that the owner in fact has approved the change order. There may also be included a provision that places all claims to be pursued in the hands of your customer. Under this combined scenario, as a subcontractor or supplier you are gambling against the odds. You may be ordered to provide additional services or materials and in fact may even be given a written directive to do so. However, payment is subject to the owner’s rejection of the claim for a change order n the basis that the work or materials were within your customer’s initial scope of work. If your customer has no obligation to pay for change orders other than where the owner may approve them, placing the claims ability solely with your customer is an all but useless exercise since it has no stake in the game. Furthermore, your customer can arguably even negotiate away your particular claim in exchange for one of its claims.

3.                  Clauses that tie performance responsibilities on this project to other projects or contracts.  These clauses may actually flow both ways. Large suppliers may include provisions within their terms and conditions of sale that allow them to disrupt performance on project A if payments on project B have not been made or other issues have arisen. Similarly, a clause may be included within a project that would allow your customer to deduct or withhold funds due the particular project if you have a separate project with them that has become a problem.

4.                  Clauses from your suppliers or subcontractors that would allow them to apply payments to other projects.  Similar to the above situation, you may see a clause with terms and conditions presented by a subcontractor or supplier to you that allows them, in the instance of multiple projects, to apply any payment received to the oldest outstanding invoice regardless of which project it may affect. This may allow them to apply monies to a disputed bill on a separate project leaving you open for lien claims, performance suspension and other adverse consequences on the current project.

 There may be other red flags that create situations where it is better to walk away from the contract rather than risk non-payment. You may also be faced with a situation where there is no single walk away clause however the cumulative effect of a series of clauses is such that your non-payment radar has been activated. In these situations, unless you can negotiate changes, it may be worth your while to allow one of your competitors to risk developing an unmanageable account receivable. The best defense to these clauses is to carefully read and understand the proposed contract, including the “boilerplate” and make a reasoned business decision of whether or not you have been dealt a good enough hand to stay in the game

CURETON CLARK, P.C.

James H. Landgraf, Esq.