Pay-when-paid vs pay-if-paid: what the clause means in your state
Pay-when-paid sets when a general contractor must pay a subcontractor after the owner pays; if the owner never pays, the GC still owes the money after a reasonable time. Pay-if-paid makes the owner's payment a condition precedent, shifting nonpayment risk to the sub. Texas allows pay-if-paid only within the limits of Business and Commerce Code Chapter 56.
This guide is general information, not legal advice. Statutes and cases are cited as checked on 2026-10-21; have counsel confirm how they apply to your contract and state.
What is the difference between pay-when-paid and pay-if-paid?
The two clauses read almost the same and do opposite things when the owner stops paying.
| Pay-when-paid | Pay-if-paid | |
|---|---|---|
| Legal nature | Timing of payment | Condition precedent to payment |
| If the owner never pays | The GC still owes the sub after a reasonable time | The GC owes nothing; the sub carries the owner's credit risk |
| Typical wording | "within 7 days after Contractor receives payment from Owner" | "receipt of payment from Owner is a condition precedent to Contractor's obligation to pay" |
| Ambiguous wording is read as | Pay-when-paid, in most US courts | |
How do courts tell them apart?
The leading case is Thos. J. Dyer Co. v. Bishop International Engineering Co., 303 F.2d 655 (6th Cir. 1962). The court read a "five days after the owner pays" clause as postponing payment for a reasonable time, not as shifting the risk of owner insolvency. To shift that risk, the subcontract has to say so clearly, and most states follow that rule.
The standard forms are timing clauses. AIA A201-2017 Section 9.6.2 requires the contractor to pay each sub no later than seven days after it receives payment from the owner. On federal work, FAR 52.232-27 requires the prime's subcontracts to include payment within 7 days of the prime being paid, plus an interest penalty.
Is pay-if-paid enforceable in Texas?
Yes, with limits. Texas Business and Commerce Code Chapter 56 calls it a "contingent payment clause" and lets the GC rely on it only within these rules. It cannot be waived by contract (56.004).
- GC's own default (56.051). The clause cannot be enforced to the extent the owner withheld payment because the GC did not meet its own contract obligations.
- Sub's notice (56.052). After the 45th day following a proper written payment request, the sub can send written notice objecting to further enforcement. It takes effect on the latest of the 10th day after the GC receives it or the interest-accrual dates in the statute, and covers work performed after that date.
- Sham relationship (56.053). No enforcement if the GC and owner are in a sham relationship as described in Property Code 53.026.
- Unconscionable (56.054). No enforcement if unconscionable. The GC has a safe harbor if it disclosed the owner's financial information in writing before the subcontract became enforceable and tried to collect or offered to assign its claim.
- Liens survive (56.055). The clause cannot be used to defeat a mechanic's lien under Property Code Chapter 53.
Chapter 56 does not apply to contracts solely for design services, for civil work such as roads, bridges, utilities and water or wastewater plants, or for one- to four-family homes (56.002). Clauses that only set a reasonable payment period are unaffected (56.003).
Which states restrict pay-if-paid?
As of October 2026. Check the governing-law clause first: Texas Business and Commerce Code 272.001 voids a clause that puts a contract for Texas real property under another state's law.
| Jurisdiction | Position | Source |
|---|---|---|
| Texas | Allowed, subject to the Chapter 56 limits above | Bus. and Com. Code Ch. 56 |
| New York | A clause that makes the sub bear owner nonpayment risk is void as against public policy | West-Fair Electric v. Aetna, 87 N.Y.2d 148 (1995), relying on Lien Law 34 |
| North Carolina | Owner payment is not a condition precedent to paying a sub; contrary terms unenforceable | N.C. Gen. Stat. 22C-2 |
| Virginia (private work) | Unenforceable unless the party paying the contractor is insolvent or in bankruptcy | Va. Code 11-4.6 |
| Federal projects | Prime must pay subs within 7 days of being paid; subs keep payment bond rights against the surety | FAR 52.232-27; 40 U.S.C. 3131 to 3134 |
What should a subcontractor negotiate?
- Replace condition-precedent language with a fixed payment period after the GC is paid.
- Add a backstop date by which the GC pays even if the owner has not.
- Exclude change orders, disputed work and GC-caused nonpayment from any contingency.
- Keep lien and payment bond rights expressly, and calendar the Chapter 56 notice date in Texas.
If you are the GC and pay-if-paid is your standard, use the words "condition precedent", and in Texas send the 56.054 owner financial disclosure before the subcontract becomes enforceable. Dora classifies the payment clause in each subcontract, checks it against the governing-law clause, and cites the operative language for counsel.
Frequently asked questions
What is a pay-if-paid clause?
A subcontract term that makes the GC's receipt of payment from the owner a condition precedent to paying the sub. If the owner never pays, the GC owes nothing, unless state law limits the clause.
Can a pay-if-paid clause stop a Texas mechanic's lien?
No. Texas Business and Commerce Code 56.055 bars using a contingent payment clause to invalidate the enforceability or perfection of a mechanic's lien under Property Code Chapter 53.
How does a Texas subcontractor stop a pay-if-paid clause from applying?
After the 45th day following a proper written payment request, the sub can send written notice objecting to further enforcement under 56.052. Once effective, the clause cannot be enforced for work performed after that date, subject to the statute's exceptions.
Is pay-when-paid enforceable?
Generally yes, as a timing clause. Courts give the GC a reasonable time to collect from the owner, then require payment whether or not the owner has paid.
Does the AIA subcontract form use pay-if-paid?
The AIA documents use timing language. AIA A201-2017 9.6.2 requires the contractor to pay subs within seven days of receiving payment from the owner. A GC form that adds condition-precedent wording is a deviation worth flagging.