Building Blocks Of Construction Contracts

Author:Ms Megan K. George and Rebecca M. Wichard
Profession:Stites & Harbison PLLC

This article highlights common, but often overlooked, terms routinely found in construction contracts. Understanding how each clause operates is critical to protecting your rights and interests on every project. Because courts generally assume that parties to a contract read, understood, and agreed to its terms—and will typically enforce them as written—you should consult with an attorney to ensure you understand your contract and that it comports with applicable law.

Sample Incorporation by Reference: "In addition to this Agreement, documents forming this Subcontract include the Contract Documents identified in the prime contract between Contractor and Owner, which are incorporated by reference..."

Subcontracts routinely incorporate the prime contract and include "flow down" provisions, which bind subcontractors to the terms agreed to between the general contractor and owner. Examples of commonly incorporated terms include general conditions, plans, and drawings. By incorporating these terms and including "flow down" provisions in the subcontract, the subcontractor is bound to the prime contract terms as if it was also a party to that agreement, regardless of whether the subcontractor actually read (or received copies of) the prime contract.

Sample Pay-If-Paid Language: "Receipt of payment by Contractor from Owner for Subcontractor's work is a condition precedent to payment from Contractor to Subcontractor."

Sample Pay-When-Paid Language: "Payment to the Subcontractor for satisfactory performance of the Work shall be made seven days after receipt by Contractor of payment from Owner for Subcontractor's work."

"Pay-if-paid" clauses generally obligate the contractor to pay subcontractors only if the contractor receives the owner's payment, while "pay-when-paid" clauses are typically interpreted as a timing mechanism, requiring the contractor to pay subcontractors within a specified timeframe after it is paid by the owner. While they seem similar, the difference in how each clause is interpreted is significant. In many states, "pay-if-paid" clauses are enforceable. When enforced, the clause shifts the risk of owner's nonpayment to the subcontractor and, in the event of owner's nonpayment, the contractor is not obligated to pay the subcontractor for its work. On the other hand, "pay-when-paid" clauses are interpreted requiring payment to a subcontractor within a reasonable time, and will not completely shield the contractor in the event of the...

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