Watch Out for Contingency Clauses in Your Construction Contract

Having an enforceable contract is important for construction businesses, especially when taking on larger projects. While the basics of an enforceable contract are simple, the details can bite you when you least expect it. A contract, in short, is an agreement, generally written, between two or more parties, that they intend to have bind them to do certain things of value in return for consideration, generally money. For more information on contract basics, read our article on what makes a contract enforceable.

Contingency Clauses

There are, however, details sometimes hidden in the terms of the contract that can make them difficult or impossible to enforce. One example that is commonly used in the construction industry are contingent payment clauses.

For example a "pay if paid" clause is a payment clause that states that the contractor is obligated to pay its subcontractors only if the contractor receives payment from the owner.

Contract terms and conditions that state that your customer must be paid before they are required to pay you are a common occurrence you need to watch out for or risk nonpayment. Do you want to wait for something else besides doing your work before they have to pay you as you agreed? In the broadest sense, for example, in order for your business to receive payment, isn't it enough that you have to complete the work first?

Don't let your customer shift liability of the pay when paid clauses to you. While a clause of this nature might be required, there are variations. First always add at the end of that sentence "payment will be made not longer than 75 Days" from your billing, There are also pay if paid or pay when paid clauses that require you to be on the alert. Courts interpret pay when paid as delay of payment for a reasonable time period but courts view pay if paid clauses as a defense to your ability to sue your customer.

Contract Review

To ensure your contract is enforceable and doesn't have any unforeseen pitfalls, it's smart to have an experienced professional review the contract for you. In addition to ensuring the agreement complies with all the basics to make it enforceable, it should be reviewed with an eye towards spotting any phrases that might cause you trouble, unexpected expense, or the loss of your payment down the road.

There are a number of different types of contingency clauses that might be added to a construction contract, from unexpected expenses to having to wait for payment until a certain event occurs. Want to learn more about building the best contract for your most complex projects? Request a custom lien seminar for your company, led by one of our lien experts.