A common contract payment clause in Colorado construction contracts is “pay when paid clauses in construction contracts” or “paid-if-paid” clause. The immediate concern for most Colorado construction subcontractors is the impact to their everyday operations when the owner does not pay the prime contractor.
The first approach to this level of construction contracting is to never simply sign a construction contract without carefully reading these critical provisions. Although you may have a large prime construction contractor that tells you to either sign or don’t sign, it is ultimately up to you to negotiate this type of payment clause.
Colorado construction law generally suggests that absent a paid-if-paid clause, the owner’s failure to pay the prime contractor does not serve as an excuse for not paying the subcontractor.
Colorado courts generally disfavor such payment clauses, they will generally interpret them as a “pay-when-paid clause.” If no payment is received from the owner, then payment should be made within a reasonable time after the subcontractor performs the work.
Under Colorado construction law, courts will enforce if the contract language is clear that payment by the owner is a condition (precedent) to the prime’s obligation to pay the subcontractor.
As a subcontractor, you must understand that the risk of non-payment is on you. If you sign such a clause, you should realize that on large invoices to the owner, the prime’s invoice payment can be delayed as a result of a dispute. You do not want to run the risk of closing your doors in this type of situation.
You may want to consider having an experienced Colorado construction attorney to negotiate a better payment condition.
Construction Payments for Changes Not Authorized By The Owner: What happens when the prime has directed you as the subcontractor to perform a change not authorized by the owner?
This is commonplace in performance of construction projects. Can the prime rely on a paid-if-paid clause to then argue that you are not entitled to payment? This can be a tough one. However, it would seem that if the directed work is not part of the agreed-upon contract with the owner, then it would be expected that the government would not be anticipating an invoice from the prime contractor.
It would seem unlawful for the prime to couch non-payment under a paid-if-paid clause because there was no agreement or direction from owner to do the work to begin with.
Payment Bond Claims and Paid-If Paid Clauses: As subcontractor, you want carefully analyze whether to send out a payment bond claim when there is in fact a paid-if-paid contract payment clause. Unless facts dictate otherwise, the surety would not have to pay the claim if the paid-if-paid payment clause is enforceable. Many Colorado construction companies make this mistake only to find out that they have wasted valuable time and effort.
Should you notify the owner that the prime is not paying you? The answer depends upon some very important facts. For example, if there is a paid-if-paid clause in your contract, you must determine whether the prime has been paid by the owner.
If the prime contractor has not been paid, then you may be out of luck. On the other hand, if the prime contractor has been paid, then you may have a prompt payment claim or violation of the Colorado Trust Fund Statute.
Bottom Line on Colorado Construction Payments
Colorado courts will enforce a paid-if-paid clause if the construction contract has clear language that payment from the owner is a condition (precedent) to the prime’s obligation to pay a subcontractor.
You should seriously consider seeking legal help from a Denver, Colorado construction lawyer to possibly negotiate better terms. If you sign the contract, you may regret it down the road.